Sloan School of Management
Massachusetts Institute of Technology
15.010/ 15.011
Economic Analysis for Business Decisions
SAMPLE MIDTERM EXAMINATION
(This exam was given Tuesday, October 24, 2000)
Directions: This is a closed-book exam. Please print your name clearly on each answer book.
Answer all questions as clearly and legibly as possible. The exam has a total of 420 points; the
number of points and a suggested amount of time is indicated for each question. You must
turn in this exam along with your answer books before leaving the room.
Students in the 8:30 a.m. section:
I will not discuss the contents of this exam with anyone in other sections before 1:00 p.m.
Students in the 10:30 a.m. and 11:30 a.m. sections:
I have not discussed the contents of this exam with anyone who took it earlier this morning.
Signed: _________________________________
Print your name: __________________________
15.010/15.011 – Sample Mid-Term Exam (given in 2000)
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1. (160 points; 28 minutes) Decide whether each of the following statements is True,
False, or Uncertain, and give a brief but clear explanation of your answer. (Most of
the credit will be given for the explanation.)
1a) Your company makes a cordless electric drill for the retail market. Drill prices are
described by the following hedonic price equation:
Ln P = 3.60 + .046 Ln (M) – .893 Ln (W) + .928 Ln (L) + e ,
where P is price in dollars, M is the drill’s maximum speed, W is weight in pounds
and L is average life in years. “Ln” indicates a natural logarithm. Your drill
currently sells for a price of $ 59.95, with a maximum speed of 4000 revolutions per
minute, a weight of 10 pounds and an average lifetime of 7 years.
You can lower the weight of your drill from 10 pounds to 9 pounds by using lighter
materials, at an additional cost of $ 5 per drill. (The change would not affect drill
speed or life). You should recommend making this change.
(Note: you do not need to calculate logarithms to answer this question.)
1b) When Boeing recently tried to expand its level of output, production costs per
aircraft rose substantially. The reason is that Boeing was experiencing diseconomies
of scope.
(The following 2 questions require a newspaper clipping that is not available any more.)
Read the news clipping below regarding the imposition of a Value Added Tax (VAT)
for the following:
1c) The appropriate market definition for transport on this route from Sweden to
Denmark includes the ferry operators.
1d) The Oresund consortium was unable to pass the tax increase onto consumers in the
form of higher prices because the market demand for transport on this route is
inelastic.
Add clipping
15.010/15.011 – Sample Mid-Term Exam (given in 2000)
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2. (60 points; 12 minutes) Many observers regarded the Sony Playstation as the industry
standard for dedicated video game consoles from 1996-1999. In 1999, the Sega
Dreamcast was introduced as a superior alternative to the Playstation, although there
was not a large amount of software developed for it. (Software/games written for one
company’s game console is incompatible with another company’s console.)
In addition, Sony has spent several years and $500 million developing its new video
game console, Playstation II, a machine with substantially more advanced features than
Sega’s Dreamcast. In fact, during the launch of Sega’s Dreamcast, Sony advertised
heavily that the Playstation II would be available soon, and as a result, many consumers
have delayed purchasing a new game console. Playstation II is widely expected to
become the most popular video game console once it is released
Comment on “There is a powerful network externality at work in the video game
console market.” Be sure to define positive network externality, indicate whether this
statement is true or false, and clearly explain your reason.
3. (100 points; 20 minutes) America’s Game, Inc., is a monopoly producer of baseballs.
Suppose that the demand for baseballs is given as
Q = 40,000 – 20,000 P
where P is in dollars per baseball. Baseballs can be produced in a facility in Southeast
Asia, with cost function
C(Q1 ) = (1/20,000) (Q1) 2.
Baseballs can also be produced in a facility in Latin America, with cost function
C(Q2 ) = (1/40,000) (Q2) 2.
3a) Illustrate graphically the monopolist’s problem: optimal total production level and
production levels for baseballs in the two production facilities. Is any output produced
in the Southeast Asia production facility (given that its cost curve is higher than that for
Latin America, at all output levels)? Why or why not?
3b) What is the optimal price of baseballs? How many are produced in Southeast Asia?
How many are produced in Latin America? What are total profits to America’s Game,
Inc.?
(See next page for problem 4)
15.010/15.011 – Sample Mid-Term Exam (given in 2000)
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4. (100 points; 20 minutes) Workers must travel from Judsonville to the Daviston copper
mine and return every day. On a monthly basis, demand for bus rides is given by
P = 200 - 2Q
where P is in cents per ride and Q is in thousands of rides. The marginal cost of each
ride is 40 cents (there are no economies of scale and no fixed costs).
4a) Suppose that the transit business is perfectly competitive, and there are no barriers
to entry. How many bus rides are sold, what price they are sold at, and what are the
values of consumer and producer surplus?
4b) Suppose that an exclusive license is obtained by Trailaway to provide transit
between Judsonville and Daviston, so that Trailaway is a monopoly provider of these
bus rides. How many bus rides are sold and at what price they are sold? What is
Trailaway’s profits, and what is the dead weight loss relative to 4a)?
4c) Suppose that a government subsidy of 20 cents per ride is paid to the Trailaway
monopoly. How many bus rides are sold and what price they are sold at? What is
Trailaway’s profit, what is the cost of the subsidy program, and what is the dead weight
loss relative to 4a)?
.